NEW YORK ( TheStreet) -- The U.S. economy added far fewer jobs in May, suggesting that the recovery in the employment market might be stalling.

According to the Bureau of Labor Statistics, nonfarm payrolls increased by 54,000 on a seasonally adjusted basis in May, after rising by an average of 220,000 in the prior three months. Economists were expecting the payrolls to rise by 169,000, according to Briefing.com. That is the lowest payroll growth since September 2010.

The private sector, which has been the main contributor of jobs amid layoffs at the state and local government levels, added 83,000 jobs, a marked slowdown from the 244,000 jobs averaged in the last three months. Economists predicted companies would add 180,000 jobs in May, their expectations diminished by the ADP report Wednesday which said companies added only 38,000 jobs.

The consensus estimates don't always reflect actual market expectations because analysts don't always revise their estimates based on the ADP report. The "whisper" number for the markets may have been closer to about 100,000. So even by those metrics, the jobs report is severely disappointing.

Reacting to the dismal report, Patrick O'Keefe, director of economic research at J.H. Cohn, said, "This report stands out as a recommendation to all economists to go through a course in humility. I expected, even after the ADP report, a much better report than this. But as Keynes said -'when the facts change, I change my mind.'"

According to the Labor Department's survey, the auto, retail, nondurable goods and health care sectors shed jobs in May. The government laid off another 29,000 workers in May, after shedding 19,000 in April and 25,000 in March.

But more striking than layoffs was the slowdown in hiring. After adding 38,000 jobs in April, the goods-producing sector created only 3,000 jobs in May. Manufacturing shed 5,000 jobs in May, after hiring 24,000 people in the previous month.

The private services-providing sector, the biggest contributor to employment, added only 80,000 jobs, after creating 213,000 in April. In April, the ISM Services Index showed a dramatic slowdown to 52.8% from 57.3% in March. The Institute for Supply Management said at 10:00 a.m Friday that the Nonmanufacturing Index rose to 54.6% from 52.8% in April, better than the 53.3% economists were expecting.

Temporary help, which has contributed one in six 6 jobs during the recovery, also saw a drop of 1,200 jobs.

"The flattening in temporary help, given the marginal headline employment gain signals that employers have become even more reluctant to increase payrolls in the face of sputtering expansion," O'Keefe noted.

With hiring slowing dramatically in May, the unemployment rate ticked up by a tenth of a point to 9.1%, higher than the 9% economists were expecting.

Discouraged workers, who are not counted in the survey as unemployed because they have stopped looking for work, dropped to 822,000 in May from 989,000 in April. The data on discouraged workers isn't seasonally adjusted. That could be one explanation for the uptick in unemployment, as discouraged workers return to the work force.

Meanwhile, the employment-to-population ratio, which is a more reliable metric, remains unchanged at 58.4%, still lower than the 62.7% levels before the recession.

In May, average hourly earnings for all employees on private nonfarm payrolls increased by 6 cents, or 0.3%, to $22.98. The average work week for all employees on private nonfarm payrolls remained at 34.4 hours in May.

Economists reacting to the report said some of the factors behind the weakness of the report were temporary.

"Overall, this is horrible, and if we thought it would continue for much more than another month or two we would be seriously worried," wrote Ian Shepherdson, U.S. economist at High Frequency Economics, in a note.

"But we think it is largely a reaction -- an overreaction we would say -- to the rise in oil prices, and a very real hit to autos and tech from the Japan earthquake. But oil prices have now reversed more than half their gain since Feb, and consumers have not rolled over. The market reaction to these data is understandable, but that does not make it sustainable," said Shepherdson.

O'Keefe at J.H. Cohn said the data suggested that the pace of the recovery had decelerated but there was no real downturn.

"One important point that economists fail to emphasize is that the business cycle is not composed of neat compartments of expansion and contraction," he said. "When we look at past recoveries, it is not uncommon to see the pace of change accelerate or decelerate in different phases."

Still, the economist is less optimistic about his outlook for jobs in 2011.

"I am certainly going to lower my estimate for jobs at the end of the year," said O'Keefe, who originally expected 2.75 million to 3 million jobs will be added in 2011.

"The incremental nature of the recovery -- where we see jobs, incomes, consumer spending, retail sales, you name it not jump but improving marginally - augurs for slow gains in employment. I don't see a breakout number in the horizon," he said.

The weak employment report is the latest sign that the economy is sputtering. Economists are cutting back GDP forecasts for the third quarter to close to the lower end of 2% from 3% previously.

That has the market scaling back its expectations for a monetary tightening by the Federal Reserve anytime soon.

"We will be re-evaluating our expectations of a Federal Reserve unwind," Robert Dye, economist at PNC Financial Services, wrote in a note. "Indications are now that the sequence of steps that the Federal Reserve must undertake to 're-normalize' policy will be delayed relative to our previous expectations which put the first round of Fed funds tightening at March 2012."